End of the dole for the states

Uncle Sam gives away more than $600 billion annually to states and localities. It's time to turn off the spigot.

Originally, states funded the national authorities. There was no enforcement mechanism, however, so the Articles of Confederation didn't yield a very effective continental government. But the principle made sense. The best way to constrain national politicians is to make them dependent on local folks for money.

This idea was tossed aside when the Constitution was ratified. It provided the federal government with independent sources of revenue, but still envisioned states playing the dominant government role in citizens' lives.

Alas, the Civil War demonstrated the truth of Randolph Bourne's axiom that “war is the health of the state.” The national government avidly pursued new revenue sources to satisfy its voracious appetite for cash.

In the early 20th century, Washington had a vast new source of money, the income tax. Authority, prestige and resources flowed to Washington.

As the national government absorbed ever more of America's resources, states and localities eventually became dependent on Uncle Sam. There are constitutional restrictions on what the national authorities can tell other governments to do. There are far fewer limits on what the national authorities can bribe other governments to do.

According to the Congressional Budget Office, as of 2011 there were more than 200 grant programs administered by 30 federal agencies costing $607 billion. Almost half of current transfers, $293 billion, go to health care, principally Medicaid, the shared program which threatens to bankrupt both national and state governments.

Welfare, officially styled “income security,” accounts for another $114 billion. Education, a one-time quintessentially local activity, consumes $89 billion. Another $61 billion goes for transportation, a function which – other than some genuinely interstate facilities – also should be the responsibility of states and localities. Then there's $50 billion for everything else.

Some federal subsidies are intended to encourage state experimentation. In other cases Congress may genuinely believe that state activities yield spillover benefits.

However, far more important are the least benign motivations. The first is to get states to go along with federal priorities. Washington prefers mandates, but that generates opposition.

The second is income redistribution. Federal grants allow national politicians to “spread the wealth around,” or, as the CBO more delicately put it, “use the broad federal tax base to redistribute resources among communities and individuals.”

This is bad policy for several reasons.

First, Uncle Sam is bust. He is in effect borrowing to fund all of these grants. Second, separating responsibility for raising money from spending it creates perverse incentives. If no one entity is comparing both costs and benefits, there will be a bias toward more spending on projects. Third, states and localities naturally will spend less if the federal government spends more. Fourth, Washington uses cash to subjugate states and localities. Admittedly, the submission is technically voluntary, purchased with national taxpayers' money. However, the process has malformed the constitutional system. Why should the national government decide speed limits, drinking ages and welfare payments for every city, town and village across the country?

States apparently have become so hooked on federal money that they feel unable to assert their institutional prerogatives. In this way federal grant-making undermines America's constitutional system, particularly the commitment to separate and limited government powers.

It is time to rethink federalism. Federalism is not having the national government give money to states and localities. Federalism is the national government allowing states and localities to raise and spend their own money.

President Ronald Reagan is remembered for ending revenue sharing (under which Washington wrote checks with no conditions) and consolidating many categorical grants into less restrictive block grants. However, he advocated ultimately turning back responsibilities and resources to states and localities.

Congress could begin by scaling back inter-governmental grants with the ultimate objective of ending federal transfers. As for revenue, legislators should start by ending federal excise, estate and gift levies, leaving those to states. Over time, lower federal income tax rates also would leave more room for states.

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